When two companies compete and in turn both lower their prices as with cable and DSL does anyone benefit? You would think the consumer benefits due to the lower prices but this is not always true. When two companies compete and end up in a price war, generally both companies lower value along with price. In the end the companies lose profit and the customer loses value.
Posted by Will
4 comments:
I care! You can't tell me you'd rather pay $30 for 4 local channels and 73 game show / celebrity gossip / design your house for $3 channels, than pay $40 for 30 good channels! I think these price wars definitely hurt consumers sometimes.
Will: Make sure I give you credit for this!
-1 on Seth's comment for grammatical errors.
In reality, it isn't likely to turn out this way. In classes, we talk about firms competing by changing their prices this way, but the same argument will follow for competition through markups. Eventually they will be driven to zero.
It is true, however, that one way to compete is to reduce quality. But, what will happen is that firms will compete along more than one dimension (say, quality and price). Ultimately, they will still ring out anything that permits abnormal profits. It is even possible for them to compete by raising quality.
Boris: I feel your pain ;) but you are bringing up two somewhat different issues. One is bundling, where the idea isn't always to offer the perfect bundle. The other is price discrimination, where they get you to self-select into a category that makes them more money.
Dr. Tufte mentioned that even though we talk about firms changing their prices, they can still ultimately compete with anything that brings abnormal profits. Dr. Tufte suggested that firms could compete by raising quality. This is very true. Of course you have basic staples (example: potatoes) that have reached market penetration, but for most other items, it takes awhile to get to that point. When a company can differentiate themselves and give customer more perceived value, there is room for them. If enough people are complaining about cable then another company will realize the market potential and create a cable company with great service. Customers will go to whichever company better fits their needs and gives them more consumer surplus.
Agreed. I think it's pretty hard to assert that competition doesn't help us get better stuff.
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